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Comment by alister | Hacker News Reader

> In the 17th century, people sometimes issued perpetual debt. But it is very rare that there is an uninterrupted history when governments or other entities have not defaulted on those debts.

Ever see those banking website ads or financial planning brochures that tell you that you can become a millionaire by the time you retire if you sock away just $75 a month through the magic of compound interest? The math checks out, but the longer the time horizon the more likely it is that wars, bankruptcies, currency devaluations, revolutions, government confiscations, hyperinflationary periods, and other economic cataclysms will wipe out your investment.

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Around the developed world, interest rates are at a historic low over the last 20 years or so. The EU borrows at 0%. Argentina issued a 100-year bond at 8%, for God's sake.

One way to tell this story is that investors have unprecedented trust in global stability. They rate the risk of wars, bankruptcies, revolutions, etc extremely low.

There are other interpretations: you can say that central banks keep interest rates artificially low through control of the money supply, or compel investors to buy government bonds at artificially high prices, and both are reasonable arguments. But treating a price as a function of both supply and demand, I think there's a lot of truth in the "peaceful, stable" interpretation.

I think there's "trust in global stability" and then there's "trust that none of this will matter anyways if the global economy destabilizes". It's too big to fail.

I worry that people's trust in the system also creates apathy about the things that can break it. The tragedy of the commons is alive and, well... tragic.

> none of this will matter anyway

That's a bit of a self-fulfilling prophecy.

What I mean is that the mindset that "none of this will matter anyway if <foo>" injects some measure of irrational optimism into the economy, causing the relative economic severity of the occasional inevitable blip to increase somewhat.

We'd all do well to rationally consider the (small) risk of widespread destabilization. Doing so may keep bubbles smaller, but that's a good thing insofar as they are bubbles relative to value.

Being too big to fail is a testament to a working beautocracy. Before, things would just fail no matter how precious.

It's not that investors have trust, it's just that there's no alternative.

People say this, but I didn't consider it worthy of being mentioned as a serious reason. You can invest in stocks or commodities or real estate or these days cryptocurrencies. They all have great historic returns but some people and some institutions instead lend their billions to the world's governments at such low prices. You can't say with a straight face that there are no other plausible investments.

You could tell the opposite story: bonds continue to be popular and pricy because the world fears instability: that any other asset class may be in a bubble and about to lose all its value. But even then, investors are saying that though companies and industries may rise and fall, the countries will survive and pay their debts.

Are they saying the countries will pay their debts, or are they saying that they know that they can turn around and sell their bonds to the Fed whenever they want?

No everyone knows the high yield Argentinian debt is trash. The investment managers and traders buying it today think they're smart enough to offload it to some sucker before the next default. Or they expect to move on to another job before that and just don't care about what happens long term.

Well, in either case, the valuations are based on the expectation that they can sell the bonds to somebody else, rather than the expectation that they will collect on the debt.

They’re talking about the institutional market. If you are a big holder of money, you basically have no place to park it other than bonds.

The central bank cannot actually stem the tide in a loss of market confidence, central bank actions all depend on people retaining confidence in the currency to begin with.

If a central bank wants to buy government bonds from all the sellers and government treasury, it is always purchasing by diluting the currency. Once the market gets tired of bagholding the currency then the central bank has outlived its utility and the government cannot sell any more bonds because all the sellers evaporated.

Trust hasn’t much to do with it, there are people with much capital and nowhere to put it accepting anything.

> investors have unprecedented trust in global stability

That's one way to spin it. Another is "investors have unprecedented low trust in traditional investment tools". (If you have extra money laying around and no way to put it to productive use then you just might dump it all into bonds, because it's the default option and you don't have much in the way of alternative anyways.)

The rise of "bockchain" corroborates.

Given rising debt loads, this view seems myopic. Presumably if the balance of foreign debt outweighs the risks of walking away from it - countries will eventually walk away from it.

It may simply be that revolution or other political instability will be required prior to countries walking away from the debt.

I’d doubt any major power could or would fight a debt war in the 21st century.

> Ever see those banking website ads or financial planning brochures that tell you that you can become a millionaire by the time you retire if you sock away just $75 a month through the magic of compound interest? The math checks out, but the longer the time horizon...

Those flyers depend on a high-interest environment. At 1% annual interest (0.083% monthly interest), accumulating $1,000,000 by saving $75 / month would take just over 3,000 months, or 250 years.

Your deposits would only total about $225,000 over that time, so the "magic" of compound interest is still apparent, but it doesn't make for a compelling sales pitch.

"Quintuple¹ your money in just 250 years!

¹ Almost."

To a reasonable approximation, no financial planner is telling anyone to sock away their money exclusively in a low-interest savings account. Stock historical yields are well in excess of 5%, which changes the math substantially. Even the 3-4% "secular stagnation" fearmongering that was all the rage five years ago improves the math substantially over the 1% figure you've chosen.

$75/mo is definitely too low for a realistic time horizon, though. $500/mo at ~5% for 45 years (e.g., working 20 to 65) gets you >$1mil, with 270k basis.[0]

[0]: https://www.investor.gov/financial-tools-calculators/calcula...

For what it's worth, a spare $500/mo is never going to happen. I think I was 33 before I had an extra $500/mo.

$500/mo is $6k/year. There are definitely people for whom that is not possible, but there are a lot of people for whom that is possible. If you work in software, odds are pretty good you're in the latter category, even at the start of your career. $1M as a target is chosen arbitrarily, and often people save less earlier and more later; it's a simplistic model. (As financial advice: you should still save, even if you can't save $500/mo.)

"Never going to happen" is probably overstating it.

If you had reduced your latté consumption by just 5 lattés per day you'd have had that spare $500.

That means I have to make and sell 4 lattés per day, which doesn't seem probable.

You just need to invest in an automatic espresso maker to have your 5 lattes a day at a reasonable price.

But this is all thinking from an American perspective. Plenty of other countries with higher interest rates in the range of 7 to 9 percentage from banks and double digit from the share market.

I do wonder why don't more people move in to the third world from the West, it makes a lot of sense I think, especially if one is looking for financial independence. In third world, generally the same amount of money goes much longer than in the West.

> In third world, generally the same amount of money goes much longer than in the West.

There are some things that just cannot be purchased in the third world, though. Stability, a well educated population, a fair court system, confidence in the institutions that supply infrastructure (roads, trains, bridges, water, electricity, etc.), low perceived corruption, confidence that property rights will be upheld, high trust low friction transactions, and so on.

There's definitely variance between the different first and third world countries, and all countries have their pros and cons, but some things can definitely not be purchased with money.

> Plenty of other countries with higher interest rates in the range of 7 to 9 percentage from banks

Technically, only interest rate above inflation is interesting though. Might be 8 pct at high inflation still wins out, though.

> and double digit from the share market.

I'm curious about this - we're are these emerging markets? I suppose the Asian Tigers have slowed down a bit? Parts of Africa and South/Latin America?

My original comment was in dollars in response to a comment in dollars; we've been talking American perspective the whole time.

I don't think it's as reasonable to make 45-year compounding interest models for retirement in 3rd world economies. There's just a lot more going on as far as stability, interest rates, personal safety, etc. You can still do it, but I don't know if the numerical result tells you anything.

Well they've gone from using their savings accounts in the calculations to just putting everything into the stock market, usually the S&P 500.

Its a win-win - they get to charge higher transaction fees and management fees if its their own product, and the recent bull market makes the customer think they're going to get 7% returns forever. Just as long as they don't need to withdraw their money during a recession.

The worst-ever 20-year return for the S&P 500 index was +6.4% per year. It’s not the recent bull markets convincing investors that 7% returns will come forever. It’s a long history of such returns.

https://www.thebalance.com/rolling-index-returns-4061795

(Obligatory remark about the Nikkei's last 30 years)

Exactly. We are fooling ourselves if we think that the S&P 500 is immune to being in a bear market.

That data looks at January 1979 to present. I believe ever includes the rest of the 20th century as well...

There was certainly a negative return over 20-year periods including the Great Depression.

And negative real returns during the 1970s stagflation.

It's also only looking at the US, cherry-picking a country that has had an unusually good run of stability for the past few centuries.

Ask Germans or Russians what the worst rate of return for a 20-year period was in their country.

The S&P 500 just didn't exist before 1957, so it can't say anything about back then. Remember S&P 500 is actually a specific (actively-managed!) large cap index.

I'm not sure what the return on all US stocks is since then, but Japan's market has only just returned to the level it was at in its 80s bubble.

Right, there was an index in place during the Great Depression for sure. From wikipedia: https://en.wikipedia.org/wiki/S%26P_500

History

In 1860, Henry Varnum Poor formed Poor's Publishing, which published an investor's guide to the railroad industry.[20]

In 1923, Standard Statistics Company (founded in 1906 as the Standard Statistics Bureau) began rating mortgage bonds[20] and developed its first stock market index consisting of the stocks of 233 U.S. companies, computed weekly.[1]

In 1926, it developed a 90-stock index, computed daily.[1]

In 1941, Poor's Publishing merged with Standard Statistics Company to form Standard & Poor's.[20][21]

On March 4, 1957, the index was expanded to its current 500 companies and was renamed the S&P 500 Stock Composite Index.[1]

1929-1948 gave investors a +0.6%/year, which I think is the lowest nominal return. 1962-1981 was +0.8%/year.

As you allude, there were 20-year periods spanning the 1970s where Treasuries outperformed large-caps, but that’s fairly rare (and with the printing presses running three shifts, something we’re in extremely little danger of right now).

You just need to freeze yourself for 1,000 years..

https://www.youtube.com/watch?v=g9Z4d5EOjGs&t=27s

The biggest threat to interest compounding is inflation. Every time you see someone saying that by saving $X each month you can get $1M in 50 years, the question to answer is: what's gonna be the real value of $1M 50 years from now?

Only because you're talking about a bond with fixed payments. Operating companies (stocks) handle inflation better because they can raise prices.

But with companies you're not dealing with interest compounding, you're dealing with a company's growth prospects, which are largely unrelated to interest rates.

I've not seen a context where people where strict about saying compound interest is exclusive to interest payments. Reinvested dividends and reinvested earnings also compound.

You'll have a hard time finding companies that pay decent dividends and at the same time have high growth prospects.

He isn't saying that you'd have both at the same time. He's saying that high company growth is also compounding. And reinvesting dividends is yet another form.

This bond still yielding is an anomaly though. Instability will often manifest as inflation, but not always. Any idea which current countries have not experienced revolution, hyperinflation, annexation, and more intense events than just low or moderate inflation?

https://upload.wikimedia.org/wikipedia/en/8/88/The_Hanke_Kru... is a good starting point.

I started making a list of countries where you could reasonably be expected to have lost all your monetary savings at some point in the last 100 years. Not a full list yet, but quite impressive already. It's at https://imgur.com/a/gczjp4y .

This would be even better if the cause as well as the time period for each country was included as well.

I'm not sure that math actually checks out. By my math, you'd need to save more like $600 a month starting at age 22 to accumulate $1 million by age 65 (assuming 5% annual returns after inflation).

When was the last time a single cataclysm affected every financial market at the same time? We have a greater ability to diversify now than anyone did 100 years ago.

In practice diversification has actually gotten harder for most investors. The correlation coefficient between all major asset classes during periods of high volatility has increased across the board. Investors have had to move into riskier illiquid assets in pursuit of uncorrelated returns.

And the internet is constantly making it easier to access illiquid assets, making them more liquid.

When you say correlation coefficient, I assume you mean the positive one?

The correlation coefficient is in the range -1 to 1.

The Internet hasn't really made it much easier to invest in the types of illiquid assets that would interest large institutional investors. Those investments are still largely based on personal relationships and negotiations, often facilitated by brokers or bankers.

Yes but if they're negatively correlated and everything is tanking then they won't impact your returns as much than if they're positively correlatd.

The problem is that almost every asset class now becomes positively correlated during economic crises. It's very difficult to find negatively correlated or uncorrelated returns in those situations.

The events OP is talking about are not normal market fluctuations:

> wars, bankruptcies, currency devaluations, revolutions, government confiscations, hyperinflationary periods, and other economic cataclysms

Those are primarily political risks. Not independent events, of course, but very different than correlations between asset classes.

So what? Regardless of the cause, the point is that there will be occasional "black swan" events when all major asset classes fall together and diversification becomes less effective.

Zoom out farther. Markets regularly take major hits and then recover, but someone only invested in local markets in 1914 France or Venezuela today is starting from scratch. OP was talking about the events that leave people with nothing. Those are political events and diversification is about which governments one is exposed to.

A year ago?

It's not a cataclysm when markets recover in 6 months. OP is talking about getting wiped out.

Just wait for the (hyper?)inflation.

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